What this calculator does
A credit spread is the compensation for the possibility that a borrower does not pay. It is the corporate yield less the government yield at the same maturity, and it is quoted almost universally in basis points.
The size of the spread maps roughly onto credit quality. Seventy basis points suggests a solid investment grade issuer, while 720 basis points is firmly in high yield territory, where default is a genuine consideration rather than a remote one.
The formula
Subtract the government bond yield from the corporate bond yield at the same maturity. Multiplying by 100 converts the difference into basis points.
| Term | Meaning |
|---|---|
| Credit spread | The yield premium over a risk-free bond of the same maturity. |
| Basis point | One hundredth of a percentage point, the standard unit for quoting spreads. |
| Spread widening | Spreads increasing, which indicates the market pricing more credit risk. |
The inputs explained
| Field | What to enter |
|---|---|
| Corporate bond yield (YTM) (%) | The yield to maturity on the corporate bond. |
| Government bond yield (YTM) (%) | The yield on a government bond of the same maturity. |
When to use it
Assessing whether a bond compensates for its risk
The spread is what you are paid for taking credit risk, and it can be compared against default rates.
Tracking market conditions
Spreads widening across the market is one of the clearest signals of rising risk aversion.
Comparing bonds of different maturities
Comparing spreads rather than raw yields removes the effect of the interest rate environment.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
What do different corporate yields imply?
Three corporate yields against the same benchmark.
Questions
What does the spread compensate for?
Chiefly default risk, but also liquidity, since corporate bonds trade less readily than government ones, and any tax differences. Research consistently finds the spread exceeds what historical default rates alone would justify.
Why are spreads quoted in basis points?
Because the differences are small and precision matters. Saying 350 basis points is unambiguous where 3.5 per cent might be mistaken for a yield rather than a difference.
What makes spreads widen?
Deteriorating credit quality at the issuer, or a general rise in risk aversion. In a crisis spreads widen across the whole market at once, regardless of whether individual issuers have actually got worse.
Is a wider spread always a better deal?
No. It reflects higher perceived risk, and often correctly. The question is whether the extra yield more than compensates for the probability and severity of default, which requires its own analysis.
For the yield being compared, see the bond yield to maturity calculator. For assessing issuer distress risk, see the Altman Z-Score calculator.